Tax and Business Structure advice

Choosing business
entity is very important. The taxation treatment of entities may impacted on
commercial decision such as

  • Which entity is suitable for starting business
  • Which entity to choose when purchase an existing business
  • Which entity to choose for maximum investment growth
  • Whether to buy or sell business
  • Whether to operate an employee or a subcontractor

The basic tax issue of choosing business structure are tax ratesutilise of losscapital gain and a refund of imputation offset.

The table shows the comparison between advantages and disadvantages of each business structure
(Australian residents for Tax purpose only)

Entities Advantages Disadvantages Common issues
Sole Trader 1. A simplest structure 1. Pay tax at marginal Rates(including Medicare Levy) 1. Non-Commercial losses
2. Full control of business 2. Legally respond for all aspects of business 2. Personal Service Income
3. Receive full profit from business 3. Very weak personal assets protection
4. Inexpensive to set up 4. Responsible for losses
5. Capital Gain Discount 5. Limited Access to Capital
Partnership 1. Inexpensive to setup 1. Pay tax at marginal Rates (Individual level) 1. Non-Commercial Losses
2. More people share work load 2. Share net profit 2. Personal Services Business
3. Share losses and legal responsibility 3. Very weak personal assets protection 3. Partner’s salary
4. Capital Gain Discount (Individual Level) 4. Each partner legally respond for all aspects of business
5. Does not pay tax at Partnership Level
Company 1. Pay tax on its own profits  at 30% fixed rate 1. More expensive to establish 1. Personal Services Business
2. Ability to claim refund of imputation offset 2. No Capital Gain Discount 2. Carried forward losses
3. Greater access to Capital 3. Carry forward losses trapped in the company 3. Division 7A
4. Strong personal asset protection. 5. Losses can be carried back three years against profits 4. Franking Deficit Tax
5. Losses can be carried back three years against profits 6. Shareholder loan account must not be overdrawn
7. Director personal respond for unpaid Super and PAYG withholding
Trust 1. Limit liability if the trustee is a company 1. Establish and administration cost 1. Personal Services Business
2. Perpetual existence 2. Carry forward losses trapped in the trust 2. Carried forward losses
3. Strong personal asset protection 3. All net profit must distribute to beneficiaries 3. No present entitlement
4. Capital Gain Discount